Monday, May 7, 2007

Playing the Rent II – Tolls

Of all the alternatives to the jargonizing of the term “rent” by economists, I think that the most useful is probably “toll.” People generally know what it means, and they know how it differs from rent. Rent is what you pay for the temporary use of some material good. A toll is what you pay for access, usually to a transportation or communication system.

The key factor with tolls is that it is not necessary to control all of the things that may be accessed by the transport system that takes the toll. In fact, one does not even need to control the entire transport system, just a “choke point.” This is the epitome of “positional advantage,” an easily defended position that can extract value from a much larger area that need not be under the toll taker’s control or ownership.

There are a great many economic models that have been developed for the specific cases of transportation and communications tolls. In fact, there are so many such models that it is difficult to tell if there are examples of the use of toll models for more general processes, i.e. as a more specialized model for “rents.”

Consider, for example, that every major port city represents a choke point on a transport system, and hence represents some tolling potential. Some of that tolling potential is certainly captured by dock fees, local taxes on businesses, even by actual rents of property connected to the port itself.

But the situation is broader than that. Although the U.S. Constitution forbids tariffs between states, various sorts of “local” taxes still have the effect of capturing some tolls from transport. For example, diesel fuel taxes in California, a state that receives a great deal of foreign shipping, represent some monetary input from what is basically interstate (and international) commerce. Similarly, gasoline prices are observably higher near interstate highways than are prices at some greater distance, which represents a toll on highway drivers, especially those who are less familiar with the local area, where there may be cheaper gasoline sold in filling stations known to locals. It would be interesting to see a study of how gasoline prices cluster in sparsely served areas. Intuitively, large service areas, having major economies of scale, depress prices to some distance, with state taxes, etc. further modifying the economics of the situation.

On a more abstract level, controlling “barriers to entry” can probably be better considered as a toll than a rent. The vesting period for pension qualifications is a toll that is extracted from new employees—a toll that is forfeited by those employees who leave before vesting, and thereby passed on to either the remaining employees, the firm, or both.

This feature, incidentally, is one of those places where, in the past, unions have shown their darker side. A long vesting period allows a union to claim to have obtained great benefits from negotiations, but those negotiations result in greater privileges to current employees at the expense of those newly hired. In recent years, this tendency has grown, as union contracts have sometimes resulted in “multi-tier” pay and benefit schemes, with current employees grandfathered into the greater benefits. This has also often led to the selective firing of employees who near the time of greater benefits, as they become more expensive to the firm. One might suggest that this shows the folly of allowing wedges to be driven into group and class divisions, but such divisions are, sadly, typical when large groups such as employees, deal with smaller groups such as professional managers.

The academic/professional/guild model of employment also has elements of toll taking. The current professionals (tenured professors, physicians, guild members), benefit from the labor of would-be entrants (doctoral candidates, interns, apprentices), who are paid what would be a less-than-market wage, with the promise of later ascending to the ranks of the privileged. Added to this toll taking is a generous dollop of risk; many of the candidates for entry fail to achieve their goal, and the ongoing labor of their class fuels the much smaller class of those who have achieved entry.

Thus, we reach the next method in which wealth is accumulated and transferred from the efforts of the many to the hands of the few: lotteries and gambling. And that is a big subject, so I’ll stop for now.